Marchfirst's bankruptcy has sent fresh shudders through the internet sector

By BBC News Online's North America Business Reporter, David Schepp

When internet-consulting firm MarchFirst shut it doors in mid-April, the slam sent shudders through an industry already shaken from dozens of dot.com failures.

MarchFirst's descent into bankruptcy is a textbook case of a new economy business gone bad. It suffered from a bevy of problems, including delinquent clients, an overly ambitious venture capital programme that invested in new businesses and wads of cash handed over for ads and office space.

Following on the heels of MarchFirst's march toward insolvency, fellow web design firm Razorfish last week posted a loss of $6.6m and said its chief executive was stepping down.

The stunning slowdown in the US economy has led to shutdowns at dozens of web consultancies - businesses that some thought could survive the dot.com meltdown.

The decline of consultants mirrors the larger, overall decline in web businesses. At least 55 internet companies shut down in April, bringing the total to more than 430 since the carnage started in January 2000, according to Webmergers.com, which tracks such data.

Perfect Storm

Does the migration into other types of internet business models imply that the end of the dot.com bloodbath is in sight?

Consultancies are getting hit by a "perfect storm" of problems, he says. "This perfect storm of factors hitting that just devastated these companies, particularly the ones who weren't diversified. It's the same perfect storm that hit Cisco Systems."

In fact, the perfect storm analogy was devised by Cisco chairman John Chambers in warning that its profits for the foreseeable future would be disappointing.

Cisco blamed "global economic challenges, the slowdown in the global telecom market and the deceleration in corporate information technology spending" for its troubles.

Reduced spending

According to Webmergers' Miller the perfect storm scenario has at its core at least three components, including corporate information technology departments, which have reduced spending because of a soft economy.

Second, telecoms companies have reduced spending because they are running out of money as have the third component - failing dot.coms.

"It isn't just the Ciscos that are seeing rough times," says John Challenger of outplacement firm Challenger, Gray & Christmas. "It's also the firms who supply expertise to other business to help them manage growth and set up systems."

"What we are seeing now are the companies that were the picks and shovels of the internet industry," Mr Challenger told BBC News Online.

He said the glut of internet consultancies is not unlike the housing bust that Houston suffered following the bust in the oil industry in the 1980s.

"They built these structures without enough people to use them," Mr Challenger says. "In many ways, that is what we have seen here. We've built all these structures without sufficient businesses to merit their building."

Forging ahead

The good news is that surviving internet companies have got the message that the go-go days of internet start-up funding are over. They are rapidly adapting to cope with severely squeezed resources.

For several reasons, experts believe the rout of internet firms will start to taper off soon, noting that those that got hit hardest are the one that were seeking funding when the shake-up hit about a year ago.

Those still-existing internet firms are frenetically adapting to the new business environment, doing everything from merging to pooling money to radically revising business models.

"I just got out of meeting with an e-learning company, for example, that switched from the academic market to the corporate market and is now going great guns," says Webmergers' Miller.

"There's a lot of morphing going on of business models, adjusting of targets, that's going to lead some of the survivors to adapt."